Accounting Fundamentals

 Accounting Fundamentals

Accounting Professor: Making economic activity administration easier. This is the process by which every transaction is recorded. A financial statement is a summary of a company's assets and liabilities. Accounts receivable (what is owed to the company) and accounts payable are components of these statements.

Accounting, according to William A Paton, Professor of Accounting at the University of Michigan, has one basic function: "Making economic activity administration easier. This function has two phases that are closely related: 1) measuring and organizing economic data; and 2) communicating the results of this process to interested parties."

For example, a company's accountants will measure profit and loss for a month, quarter, or fiscal year and publish the results in a profit and loss statement known as an income statement. Accounts receivable (what is owed to the company) and accounts payable are components of these statements (what the company owes). It can also become quite complicated with topics such as retained earnings and accelerated depreciation. This is true at the highest levels of accounting and throughout the organization.

However, much of accounting is also concerned with basic bookkeeping. This is the process by which every transaction is recorded; every bill paid, every dime owed, every dollar and cent spent and accumulated.

However, the company's owners, who can be individual shareholders or millions of shareholders, are most concerned with the financial statement summaries of these transactions. A financial statement is a summary of a company's assets. The cost of an asset when it was first purchased determines its value. The financial statement also shows where the assets came from. Some assets are in the form of loans that must be repaid. Profits are also a business asset.

The liabilities are also summarized in double-entry bookkeeping. A company obviously wants to show a higher amount of assets to offset the liabilities and show a profit. The essence of accounting is the management of these two elements.

There is a system for doing this; not every business or individual can devise their own accounting systems; the result would be chaos!